Rule Could Impact Private Mortgage and Title Insurer Results

A proposal by the Financial Accounting Standards Board which it says would “improve financial reporting of insurance contracts” will affect the GAAP earnings of title and mortgage insurers but not their statutory earnings, observers said. But it is too early to determine if this proposal will be enacted in its current form.Published reports already note that the rule would impact life and property/casualty companies, whose universe includes Genworth, American International Group (the parent of United Guaranty Corp.) and Old Republic International.Statutory measures such as the 25-to-1 risk-to-capital ratio a number of states require private mortgage insurers to maintain in normal circumstances are what regulators look at to determine if an insurer is sufficiently capitalized.But this proposal would apparently require mortgage and title insurers to use a “premium allocation approach.” A FASB press release explains this means the insurer would have to take a liability on its balance sheet for the remaining coverage which represents the premium written but is not yet earned. Portions of this liability are released based on the expected timing of incurred claims and benefits.Observers added if this is adopted, it would bring FASB in line with its international counterpart. A report on the subject from Moody’s notes, “the transition to new rules is unlikely to have a broad effect on credit quality because new accounting rules do not, of themselves, alter the economic position of an entity.“However, many investors have suggested that despite the benefit of improved global alignment, the incremental volatility that would result in insurer income statements and balance sheets, as well as potential complexities in understanding how firms arrive at the carrying value of insurance contract liabilities, would make the sector less attractive for investment. Credit quality will be negatively affected to the extent the new accounting model deters investors from investing in the sector, reducing the industry’s access to capital markets.”Wallace Enman of Moody’s, who authored the report, added the change will affect companies who do insurance like products as well.The rule, if adopted, “would result in a valuation of insurance contract liabilities that would change more frequently than under current accounting.”So it could affect how investors view these companies, and creating a disincentive from investing in the industry, Enman said he heard from some investors.The rule would not have any direct ratings implications, but the secondary implications could be how it impacts investor perceptions and a possible reduction of access to capital.Fitch analyst Gerald Gomblicki agreed, saying the proposal could affect title companies, but right now the parties are still studying it to determine if and how it would have an impact. Fitch has its own measure of title insurer capital adequacy, and the proposal would not affect this or any form of statutory accounting for title companies. He too noted that insurers have to deal with two sets of standards, GAAP and statutory. While those responsible for statutory accounting rules do look to the public accounting rules, they are not bound by them.Gomblicki also pointed out that after the comment period on this, FASB could stick with this proposal or modify it based on those comments and the process could take some time.If adopted some companies, who have short-term insurance lines (like auto insurance for example) and longer-term lines (like workman’s compensation for example) could have different standards apply to different parts of their business, he said.According to one person with knowledge of the private mortgage insurance industry, the change might be beneficial. If the borrower is paying monthly premiums, those are recognized as income when they are received by the underwriter, while losses are recognized when they occur.So right now, the books of business are very profitable early and late in their lives and less profitable during the peak delinquency time frame of years three through five after origination.Under the proposal, while the lifetime results would be similar, the year to year and quarter to quarter net income would be smoother than it is today, that person said.